Taxpayers caught in the middle of costly Fannie lawsuit

Washington Post Staff Writer
Wednesday, March 9, 2011

What could be worse thantaxpayers having to pay more than $100 million to defenda shareholder-owned company and its former executives in a private lawsuit?

Losing that lawsuit.

When the government seized Fannie Mae during the financial crisis, it was clear it was taking control of a big, deeply troubled mortgage company that was hemorrhaging money on bad loans made during the housing bubble.

But it wasn't as obvious at the time that the government was also becoming a key actor in a soap opera of alleged corporate mismanagement, shareholder feuds and eye-popping legal bills.

Now, that uncomfortable role is coming into focus.

Investors who say they suffered massive losses because of an accounting fraud at Fannie are demanding billions of dollars in compensation.

At the same time, Fannie is spending tens of millions of dollars to defend itself and its former executives, leading lawmakers to question the firm and its federal regulator about why they are not containing costs.

Stuck in the middle are U.S. taxpayers.

When the government seized Fannie, it placed it in a conservatorship, a legal term roughly meaning rehabilitation for a badly damaged company. In that role, the government has taken a nearly 80 percent stake in the firm and pledged to inject cash to keep it afloat. So far, the Treasury has invested more than $50 billion in Fannie.

But the arrangement also means that taxpayers are on the line for legal costs. Money Fannie spends defending itself is money it is not using to plug other losses at the company or repay taxpayers. But if Fannie settled the case, it might expose taxpayers to far greater expense if aggrieved investors are paid anything near the damages they are claiming.

"It's a Catch-22. You've got taxpayers on both sides of the transaction," said Rep. Randy Neugebauer (R-Tex.), who leads the House Financial Services Committee's oversight panel. "The only people benefiting on this are lawyers."

Ohio Attorney General Mike DeWine, who is the lead plaintiff in the case, said harmed investors should be compensated whether or not taxpayers will be responsible for making payments.

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